Internet October 2009

The Moguls’ New Clothes

Media executives lament what the Web has done to their business. But that complaint conveniently ignores the dismal financial performance of most media conglomerates in the pre-digital era. Until media companies are willing to get back to basics and jettison the flawed thinking that has guided them over the past two decades, they will continue to disappoint their shareholders.
Myth No. 2: The Gospel of Going Global

One by-product of media companies’ infatuation with growth seems to be a fascination with global markets. The extent to which some non-U.S. markets are less media-saturated on the one hand and faster-growing on the other seems to promise a kind of growth-multiplier effect. Why wouldn’t a media mogul want to shift more operations in that direction?

But pursuit of a global footprint can be a dangerous strategy, for three reasons:

First, it’s harder to enforce barriers to entry on a global scale. Big markets by definition can support many competitors, even where fixed costs are large. Scale advantages come from the size of the fixed-cost base relative to overall costs, and in a vast global market more players can justify the fixed-cost “nut” required to operate competitively. Moreover, a niche operator or one within narrow geographic limits can defend the barricades of competitive advantage with comparative ease. That’s why the highest profit margins in media historically have been found in dominant local franchises like billboards, cable systems, broadcasting, small-market newspapers, and yellow pages.

Second, the track records of great nonmedia franchises in pursuing global strategies should give anyone pause. McDonald’s, the poster child for consumer globalization, has historically been more profitable in North America than elsewhere. Nestlé, the classic global corporation, is far less profitable than more nationally focused rivals like Hershey in product areas like chocolate confectionery. Media companies seeking to go global must also contend with severe restrictions on the ability of foreigners to own sensitive media enterprises.

Third, consumers are more and more interested in intensely local content. The movement to replace once-dominant American shows with local fare, for example, has been evident for more than a decade.

Among major U.S.-based consumer-media conglomerates, only News Corporation is meaningfully global today, with almost half of its revenue coming from outside the United States. To its credit, however, News has achieved this by pursuing a multi-local rather than a “global” strategy. Even Viacom, whose modest international operations have predominantly come from syndicating its MTV brands, has a policy of programming those networks with at least 70 percent local content.

Myth No. 3: Content Is King

Although Sumner Redstone likes to claim that he coined the phrase Content is king, it was originally popularized in connection with a series of ill-considered and now widely repudiated media deals undertaken by large Japanese consumer-hardware makers. This undistinguished pedigree has not dissuaded most major moguls of the intervening decades from continuing to parrot the slogan.

In addition to its alliterative allure, the idea that content is king has great intuitive appeal. I consume media content based on what I enjoy or find useful—surely the best company is the one with the best content! Reinforcing this simple observation is the intense emotional response that the most-powerful media can elicit. We all associate many turning points in our lives or in our understanding of the world with our exposure to a particular film, song, or book. Regardless of any developments in technology or distribution, the argument goes, the owners of this kind of precious intellectual property will also own the keys to the media kingdom.

But content cannot be king, because the talent required to create it cannot provide a sustainable competitive advantage. Even if the ability to produce compelling content perennially inhered in certain individuals or groups, there is no efficient way to monetize this skill for the benefit of shareholders rather than for the producers themselves. Big media companies may consistently exploit some creative artists, but over time, that exploitation does not produce superior corporate value. For starters, where the media companies have executives clever enough to consistently exploit the talent, these executives are typically clever enough to ensure that they are paid enough to reflect that skill. Furthermore, when particular brands seem like sure things, as in the case of a popular film franchise, more often than not a well-represented creative artist essential to that level of certainty ends up appropriating much of that value.

A number of highly profitable media companies provide so-called must-have content to professional markets, like the legal, medical, or financial communities. But even here, the actual content rarely creates the competitive advantage. Indeed, much of the content is not even owned by the media company—for instance, public legal decisions, or the price at which two parties trade a security on an exchange. The barrier to entry raised by these companies comes instead from how they integrate, analyze, and deliver multiple sources of diverse content, much of which is widely available. Put simply, the core of any competitive advantage more often than not derives from the manner of aggregation rather than the creation of content, continuous or otherwise. It is no coincidence that Google, the most profitable and successful new media company, is an aggregator, not a content creator.

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